The Good Life

Malaysian Islamic banks avoid subprime hit

None of Malaysia’s Islamic banks have been hit by writedowns resulting from the U.S. subprime crisis, and the resulting global credit crunch has spurred greater interest in Sharia-compliant financing, Malaysia’s second finance minister said on Monday.

“There is a feeling that the way Islamic finance is structured — the lack of freedom in leveraging, the need for real assets — that there will be some who will find Islamic financing interesting,” Nor Mohamed Yakcop said at the Reuters Islamic Finance Summit.

Holders of sukuk or Islamic bonds, who are paid returns derived from underlying assets instead of interest, have been shielded from the worst effects of the subprime mortgage meltdown which have hit the conventional banking sector, the minister said.

He said interest in financial instruments that comply with Islamic prohibitions against investing in sectors such as alcohol, pornography and gambling was starting to emerge in China and South Korea, adding that officials from Hong Kong had consulted with Malaysia on Islamic finance.

Non-traditional players, facing credit tightening from their usual sources of borrowing, are reported to be looking to tap into demand from the world’s 1.3 billion Muslims who are keen for Sharia-compliant financial assets.

A Deutsche Bank executive told Reuters that it was helping U.S. and Canadian firms to sell Islamic bonds in Malaysia this year worth between $300-500 million in ringgit.

“Sukuk has now become a very popular product,” said Nor Mohamed, adding that he was not aware of any potential issuance from North American companies.

LOOKING FOR INNOVATION

Nor Mohamed said Malaysia had about 76 percent of outstanding sukuk in the world but was on the lookout for ways to develop the Islamic financing industry through new products such as Sharia-compliant hedging instruments.

Malaysia issued the first international sukuk in 2002, raising $600 million, but the minister said the country had no plans to launch one this year as it has ample domestic liquidity.

“If we think we are breaking new ground, we will issue a new international sukuk bond (this year),” Nor Mohamed said, adding that the Malaysian Treasury and its state investment arm Khazanah Nasional Berhad could be sources of such innovation.

The minister also ruled out an easing of the country’s currency controls, which some investors say limit the growth of Malaysia-issued Islamic bonds.

Nor Mohamed noted that the flow of investment from Asia to the West as a result of the subprime crisis was the reverse of what happened during the 1997 Asian financial crisis.

“This is a healthy sign of growing interdependence in the world,” he said.

But he said Malaysia would not follow the footsteps of neighboring Singapore, whose sovereign wealth funds have taken high profile stakes in Western financial institutions such as UBS AG and Citigroup.

“We are not in talks with anyone. Malaysia does not have a sovereign fund the size of Singapore’s or those in the Middle East,” he said.